If you rent out property then you may need to complete a Self Assessment tax return and pay tax on rental income that you earn. However, there are some expenses that you can claim against your rental income profit that will reduce the tax you need to pay.
In this blog, we cover all you need to know about allowable expenses against rental income, so it is clear what expenses against rental income you can claim for.
What are landlord allowable expenses?
As a landlord, you can deduct some of the costs associated with the property or properties youre renting out from the profit you earn and you can do this via your Self Assessment tax return.
For example if you earn £15,000 in rental income in a year and your allowable expenses total £5,000, you’d only pay tax on £10,000 profit.
Expenses you can claim as a landlord
You need to be fully aware of the rules about what landlords can claim as an allowable expense. For a cost to be classed as an allowable expense, it must be costs exclusively for the purposes of renting out the property.
What you claim must be justifiable as being for the property and must not include any private element or costs. Some costs may be associated with obtaining title to the property, rather than being running costs. Such expenses are not deductible from income but may be deductible from the Capital Gain on sale e.g. solicitors fees on purchase of the property or extending the head lease to a flat.
What expenses can I claim as a landlord?
Heres a guide to what expenses you can claim as a landlord.
If you pay rent or ground rent for the property, then this is an allowable deduction from rental income.
Any council tax or business rates you pay on the property can be classed as an allowable expense.
Property insurance is an allowable expense. Warranties and breakdown cover for things like boilers etc. can also qualify as an allowable cost. Life insurance premiums for mortgages are not allowable deductions.
Utilities – gas, electricity, water, sewerage
It is usual for the tenant to pay for utilities, but if you do pay these bills for the property, e.g. between lets, then you can claim them as a deduction for tax purposes.
Gardening & cleaning
Property upkeep costs that you pay for are also tax allowable. This may be regular gardening or one-off cleaning between tenants.
If you provide any other services to your tenants or property, then the costs of these are also tax allowable, e.g. telephone, satellite TV etc.
Landlord service charges
Service charges that you as landlord are charged are also tax deductible from the income for that property, for example:
- Agents commission.
- Agents fees for finding tenants, taking inventory etc.
- Property management fees.
- Charges by flat management company or residents association.
You may be able to claim some expenses for necessary visits to your property, so keep accurate records.
Property repairs & renovations
Refurbishment works such as the ones below are an allowable expense incurred and therefore are tax deductible:
- Repairs – repairing something that is existing to bring it back up to original purchased quality e.g. painting & decorating, a replacement bathroom or fitted kitchen, new roof and replacing old windows for double glazed ones.
- Renewals – replacing a something entirely that the property already had e.g. dishwasher, freestanding cooker, curtains. (Note: Different rules apply for businesses and there is no tax relief for the first-time purchase of furniture or equipment.)
- Improvements – adding to your original purchase e.g. new conservatory, loft extension, adding a bathroom, putting in a new kitchen. This can include initial renovation costs if your purchase was not in a habitable state. These costs count as improvements to your original purchase so are tax deductible against the investment gain on sale of the property and not against income.
Tools & equipment
Capital allowances may be available for plant and machinery for a commercial property or ladders and tools you use that are not part of the property being rented out e.g. a Scaffold tower. Note: Capital allowances are not available for equipment in residential property unless its a Furnished Holiday Let (FHL).
Professional fees for the property may be tax deductible but need to be attributed to either income or sale/purchase to be deducted from the capital gain on sale.
- Income deductions are for things like maintenance issues, certifications, financial advice, leases and disputes or debt collecting.
- Capital Gains deductions are for buying, selling or establishing title.
Advertising and marketing
Advertising and marketing for renting your property is tax deductible from income. However, advertising for sale costs are deductible from the capital gain on sale.
Other direct costs
Any other costs you can directly attribute to the property may also be tax deductible e.g. stationery, phone calls, association membership.
Expenses you can’t claim for
- Capital expenditure such as buying a property, adding an extension or paying for furnishings can’t be classed as allowable expenses.
- Personal expenses that don’t relate to your rental property can’t be claimed against your rental profit – this includes your private mobile phone bill.
- Clothing isn’t an allowable expense. Even if you bought overalls to do work relating to your rental property, you can’t claim it on your tax return.
What if I am paying a mortgage on my rental property?
- No payments of the mortgage (either capital or interest) are deductible from taxable income.
- Finance charges and loan interest are not deductible, but limited relief is available for loan interest and other finance costs.
- You may claim the tax reduction of 20% of finance costs and mortgage interest if you re-mortgage as long as the aggregate value of the mortgage(s) does not exceed the value of your property when you first let it. Contact us for more advice.
Interest & finance charges
Tax reliefs are available for all costs of obtaining, loans to purchase property or release equity including interest, arrangement fees, bank charges, but not capital repayments. The purpose of the loan is key, and it should be transparent to track.
These costs are mostly deductible from income before tax, however the rules for loan interest have changed recently for income tax on residential property income.
From April 2020, 20% of the interest may be deducted, as a credit from the income tax bill, instead of an income deduction. Note this can have a knock-on effect on other taxes e.g. student loan and child benefit repayments.
Property income allowance
If you earn less than £1,000 a year from letting out a rental property, you don’t need to inform HMRC. This is a £1,000 tax-free property allowance. You should contact HMRC if your rental property income is over £1,000.
Simplified expenses for self-employed landlords
Simplified expenses can be used to calculate certain allowable expenses using flat rates, rather than using individual costs for your rental property. Find out the flat rates by using the government’s simplified expenses checker here.
Simplified expenses can only be used by landlords that are self-employed or business partnerships. They can’t be used by limited companies or business partnerships involving a limited company.
How to claim allowable expenses
Your allowable expenses for the tax year, are declared on your Self Assessment tax return. You don’t need to include receipts at the time you submit your tax return. However, you should keep all your receipts for allowable expenses in case HMRC ask you for evidence at a later date.
Records and receipts should be kept for six years after youve filed your tax return. HMRC can investigate at any time within this period.
For more information on how to claim your landlord allowable expenses, including the deadline for claiming, you should visit the GOV.UK website.
Knowing what allowable expenses you can and cant claim for can be a minefield for many landlords. So, if you run a property rental business, be sure to know what are allowable expenses. Use an accountant and tax advisor that are specialist landlord accountants such as dns accountants, to get clear, up to date and professional advice.
If you want more information about landlord allowable expenses or any other landlord financial advice, then contact our team on 03330 886 686 or e-mail us firstname.lastname@example.org.
Any questions? Schedule a call with one of our experts.